By Britney Nguyen

A Stifel analyst is taking a more upbeat view of the tech giant's ability to cash in on its troves of computing power

A Stifel analyst upgraded Microsoft's stock on Tuesday.

Wall Street had been concerned about Microsoft's artificial-intelligence strategy this year, up until recently. And now that the stock has picked up some momentum, a Stifel analyst thinks it can rack up further gains thanks to its cloud business.

Microsoft (MSFT) has "clearly turned the corner" following its June-quarter earnings report, which showed accelerating revenue growth in its Azure cloud-computing business, Stifel analyst Brad Reback said.

While Microsoft shares are only up 3% so far this year, they've gained 33% in the past three months. Reback expects the recent momentum for Microsoft's stock to continue given his "growing sense the company can drive sustained strong Azure upside."

The company can better monetize its computing capacity, slow the growth of costs related to its research and development for large language models, and realize revenue benefits as business for its partner OpenAI accelerates, Reback reasoned.

Against that backdrop, the analyst raised his rating on Microsoft's stock, from hold to buy, and lifted his price target to $575, representing upside of 15% from its most recent $498.55 level on Wednesday afternoon. Microsoft's shares were up fractionally in midday trading.

Reback said in his Tuesday note to clients that he expects Microsoft to continue posting strong Azure growth going forward, as the company "appears to be hitting a more sustained efficiency cadence across" chips, AI models and software. That will likely lead to leftover computing power that Microsoft can monetize through third-party apps and customers, he added.

And while Microsoft has said demand remains ahead of supply, Reback noted that it "has softened its messaging around the need to deploy additional capacity" toward some of its initiatives. That signals that Microsoft may be able to monetize more of its Azure computing power than he previously expected.

The advancement of open-weight models has been a boost for Microsoft's "agnostic" AI model strategy, Reback said, and that has him "increasingly comfortable with the company's ability to sustain" revenue growth rates in the mid- to upper-teens range. Microsoft's Azure platform hosts open-weight models that can also be used to power its Copilot offering, he noted. Open-weight models are those whose parameters, or variables learned and adjusted during training, can be downloaded, run or modified by different developers.

Reback also doubts that the company will need "outside financing," in part due to its "operational efficiencies."

Meanwhile, improvements to Microsoft 365, the company's enterprise software suite, "should enable sustained strong Copilot adoption," Reback said - and that, combined with growing use of code repository GitHub, should support the company's revenue growth trajectory.

-Britney Nguyen

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